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Conclusion of a Construction Contract
Part Three
When the Contractor Abdicates the Construction 
and Terminates the Contract

Arthur O'Leary, FAIA, MRIAI
 


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This is the third of three articles discussing the final outcome of a construction contract in three possible ways. The first is based on the normal expectations of the owner and contractor: that the project has been completed to the mutual satisfaction of the contracting parties and they remain friends. 

The second article in the trilogy considers the situation where the owner finds it necessary to eject the contractor and terminate the contract. It also covers the case where the owner finds it necessary to cancel the contract for convenience. 

This is the third article and discusses the contractor's decision to discontinue the construction and terminate the contract. 

The second and third options describe situations almost always fraught with controversy, recrimination, disillusionment, assertion of rights, attempted avoidance of responsibility, general dissatisfaction, and usually considerable legal turmoil and unexpected expense. 

Each of these differing circumstances is analyzed from the viewpoint of an architect who would have designed the project, prepared the contract documents, and administered the contract. The multitude of legal implications must be left to the scrutiny and analysis of legal scholars. 

All three contractual situations will be assumed to have been formed substantially from the standard AIA forms of agreement. (Note 1) 

What Do Contractors Expect?
The average contractor going into a construction contract expects that the owner will have the capacity and willingness to do all that is required of it by the contract. In addition they also expect that the owner will be cooperative in all relevant matters and will not be obstructive in any way. These are the normal and reasonable contemplations that anyone would entertain when entering into any kind of business dealing with others. 

It would also be reasonably anticipated that the owner would not proceed if it knew that it would be unable to perform its part of the contract. Normally the owner would have much to lose if it violated any of the contractor's expectations. 

When the Owner's Behavior Deviates from the Norm 
The contractor's capacity to make a profit on any contract is predicated on its ability to comply with the established budgets: (1) money allocations and (2) time schedules. Anything that impedes progress on the project will usually affect both budgets. The contractor would then be placed in arrears on money and time. Most contractors will have prepared each project's cost breakdown and time schedule with the expectation that their own people, their suppliers, and subcontractors will perform efficiently in accordance with industry standards and past experience. Occasionally, their estimates will prove to be faulty or they will encounter unexpected conditions that will affect one or both of their budgets. These snags and glitches are the very nature of contractors' risk taking. Contractors know that it is their responsibility to pay for their own time and money deficits. They accept this risk when they sign the contract. 

Therefore, it is shocking to a contractor to discover during construction that the owner is apparently unable to hold up its end of the bargain. It means that the contractor's business has been propelled involuntarily into economic peril in proportion to the size of the endangered project. In extreme cases it will trigger the firm's bankruptcy as well as topple some of their subcontractors and suppliers. 

Generally, the reverses that plague owners after the contract is signed are in the realm of unfortunate occurrences or unforeseen conditions. Usually unforeseen all right, although not always unforeseeable.

Sometimes owners proceed with the contract and the construction prematurely, before having in hand all such essentials as clear title to the land, lessor's permission, legal rights of way, adequate construction financing, or all necessary governmental approvals. The lack of any of these indispensable elements at the appropriate time could result in a work stoppage. It might take weeks or months to cure the problem. Meanwhile, if the construction had already commenced it would have to be curtailed or stopped. 

Work might have to be halted while awaiting decisions on matters requiring a procrastinating owner's input or approval. Proposed changes in the work might be under lengthy consideration by a vacillating owner, thereby preventing the contractor from proceeding in certain work areas. When work being held in abeyance has disrupted the planned work schedule excessively, it becomes uneconomical to continue in a piecemeal manner, so field operations must be suspended until a continuous work schedule can be pursued in all work areas. 

The contractor would seriously consider stopping work if the owner has ceased making prompt payments pursuant to the architect's certificates. A complete cessation of payments will undoubtedly result in an absolute work stoppage. 

A Difficult Architect 
Sometimes it is the architect's or engineer's procrastination or intransigence that is holding up the work. The contractor might have to stop the work if requested decisions or interpretations are not forthcoming as and when needed. Shop drawings not promptly reviewed, corrected, and returned in accordance with the approved construction schedule will prevent the construction from progressing and could be the cause of a shutdown. 

Grounds for Contractor's Termination 
Contractors finding themselves in a contractual situation where costs are out of hand due to inefficiency, misfortune, or rising prices might consider quitting the job. But these reasons are not among those stipulated in the contract. 

If the work is stopped for a period of 60 consecutive days through no fault of the contractor or its subcontractors or suppliers, because the owner has persistently failed to perform its obligations with respect to matters important to the progress of the work, the contractor may terminate the contract. (Note 2) 

If work on the project is stopped for a period of 30 consecutive days on account of owner's nonpayment or certain other specified reasons (Note 3), through no fault of the contractor or its subcontractors or suppliers, the contractor may terminate the contract. 

In either case, the contractor must comply with the notice requirements of the contract and may recover payment from the owner for work executed and for proven loss with respect to materials, equipment, tools, and construction equipment, including reasonable overhead, profit, and damages. (Note 4) 

The Architect's Position 
Whereas the architect's approval and certificate is a precondition of the owner's termination of the contract, no such approval is required for the contractor to terminate. As a practical matter, in many cases of owner financial delinquency leading to the contractor's termination decision, the architect would have previously disappeared on account of not being paid. The delinquent or impecunious owner would now be self-administering the contract. This would add immeasurably to the already distressed contractor's problems. 

The contractor's right to terminate is related mostly to lengthy work stoppages. Dates and lengths of stoppages are not matters of opinion as they are simple to document and to prove. The troublesome part is in documenting and proving justification for the stoppage. Contractors' terminations based on AIA Document A201, Subparagraph 14.1.4 (owner's failure to perform its obligations in matters important to the progress of the work) can become seriously contentious when the contractor claims to be delayed by the owner's lack of action and the owner maintains otherwise. 

In those cases where there is a difference of opinion between the owner and contractor as to the cause of the stoppage, both parties could claim the right to terminate. This situation would require the architect (if still functioning) to make a written determination that would become binding on the parties if not appealed to mediation and arbitration within 30 days. (Note 5) The architect's determination should be based on a thorough investigation of the facts and circumstances including the viewpoints of both owner and contractor. The opinion should be objective, siding with neither party. When the stakes are high, this type of disagreement is usually too controversial to end simply with the architect's decision. It will usually be concluded only after presentation to mediation or to arbitration. If the architect's administration had already been dispensed with by reason of the owner's financial incapacity, the dispute would have to be referred directly to mediation and possibly arbitration. (Note 6)  

Notes

1. The general contract would have been formed from the following AIA standard form documents:

     Standard Form of Agreement Between Owner and Contractor (where the basis of payment is a Stipulated Sum), AIA Document A101-1997, or
     Standard Form of Agreement Between Owner and Contractor (where the basis of payment is the Cost of the Work Plus a Fee with or without a Guaranteed Maximum Price), AIA Document A111-1997, and
     General Conditions of the Contract for Construction, AIA Document A201- 1997.
     The architect's services would have been contracted for by the owner using the standard AIA form:
     Standard Form of Agreement Between Owner and Architect, AIA Document B141-1997.

2. AIA Document A201-1997, Subparagraph 14.2.1: The Owner may terminate the Contract if the Contractor:
     1. persistently or repeatedly refuses or fails to supply enough properly skilled workers or proper materials; 
     2. fails to make payment to Subcontractors for materials or labor in accordance with the respective agreements between the Contractor and the Subcontractors;
     3. persistently disregards laws, ordinances, or rules, regulations or orders of a public authority having jurisdiction; or 
     4. otherwise is guilty of substantial breach of a provision of the Contract Documents.

3. AIA Document A201-1997, Subparagraph 14.2.2.
4. AIA Document A201-1997, Subparagraph 14.2.3.
5. AIA Document A201-1997, Subparagraph 14.2.4.
6. AIA Document A201-1997, Paragraph 14.3. 
7. For those interested in additional information about the closing out process based on AIA documentation, see "A Guide to Successful Construction - Effective Contract Administration," by Arthur F. O'Leary, Chapter 14, Closing Out the Job. 

“A Guide to Successful Construction: Effective Contract Administration” by Arthur F. O’Leary, FAIA, MRIAI or “Construction Nightmare Jobs From Hell & How To Avoid Them” by Arthur F. O’Leary and James Acret are available from bookworkz.com or call DCD at 800-533-5680.


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